The Hong Kong Mortgage Corp (HKMC) has appointed four banks as market-makers for its two inaugural issues of mortgage-backed securities, in an effort to create a liquid market for the products. The four are Dao Heng Bank, Deutsche Bank, JP Morgan and Merrill Lynch (Asia Pacific). The buyers of the first two issues - Dao Heng Bank and American Express Bank - have agreed to support the HKMC's move by selling all or part of their portfolios to help generate liquidity. 'The quoting of bid and offer prices by these major players will firmly establish a secondary market for our mortgage-backed securities,' HKMC chief executive Peter Pang Shing-tong said. The value of the two issues totalled $1.63 billion, of which $1 billion was issued in October to Dao Heng Bank, and $630 million yesterday to American Express Bank. Mr Pang would not give further details of the market-making arrangement, saying only that it would help widen investor participation, along with the HKMC's effort to improve investors' knowledge of the issues. American Express Bank's general manager for financial services, Alan Tsang Hing-lun, said it had been approached by a number of overseas institutions interested in investing in the issues. 'I believe the establishment of the Mandatory Provident Fund system in the SAR will increase the demand for high-quality Hong Kong dollar-denominated assets including mortgage-backed securities,' he said. The issues were sold to the two banks on a back-to-back basis. The banks sell eligible mortgages to the HKMC, which transfers them to a special-purpose company. The company then issues the mortgage-backed securities to the banks. Repackaging mortgages into negotiable securities enables banks to spread or offload risks associated with the property market, and to make more home loans. Such issues also aid the development of the Hong Kong debt market, a long-held government aim. American Express will receive a coupon return of 40 basis points over the prime rate on its $630 million tranche, plus a fee for 'servicing' the underlying mortgages - collecting repayments and transferring them to the special purpose company. Dao Heng Bank general manager Tam Ping-shing said the prevailing interest rate environment could be unfavourable for the bank to sell down its portfolio.